Delta Air Lines Inc. (DAL)

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See all Bulls Reasons Bulls: Reasons To Buy Low Valuation 80% agree Low Valuation Delta is expecting to lose about $0.74 per share this year - that's the consensus of the twelve analysts who post annual earnings estimates. On gross annual revenues of over $20 billion, we think it's a sympton of the hyper-competitive airline market that this... read more View or Edit Reason 15 votes 80% agree Industry Leader 75% agree Industry Leader Although airline stocks have always been turbulent due to the tough nature of the industry, Delta stands to persevere in tough times because of its size even though smaller airlines may disappear. Also, tough times leads to industry consolidation, and gives Delta a chance to pick up regional airlines at bargain prices. View or Edit Reason 4 votes 75% agree DAL would be the survivor of the NWA-DAL Merger 100% agree DAL would be the survivor of the NWA-DAL Merger Today, with the stock back to the $7.70 level, the options are also right back at $1.80, so we're issuing this note to say we still like this long stock / short call position very much - hold on here. Implied volatilities in the options on the airline stocks are in... read more View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears: Reasons To Sell Even coming out of Bankruptcy, Delta still has one of the highest cost structures of any airline 75% agree Even coming out of Bankruptcy, Delta still has one of the highest cost structures of any airline Even coming out of Bankruptcy this company still has one of the highest cost structures of any airline. It simply costs the discount carriers less to fly a passenger one mile, so they make higher margins and can charge lower prices. View or Edit Reason 8 votes 75% agree "Even coming out of Bankruptcy, Delta still has one of the highest cost structures of any airline" 0% agree "Even coming out of Bankruptcy, Delta still has one of the highest cost structures of any airline" Even coming out of Bankruptcy this company still has one of the highest cost structures of any airline. It simply costs the discount carriers less to fly a passenger one mile, so they make higher margins and can charge lower prices. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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This article is about the airline. For other uses, see Delta (disambiguation).

Delta Air Lines (NYSE:DAL) the 4th largest passenger airline in the world by Available seat miles (ASM), and one of the most prominent legacy carriers. In recent years, the company has faced financial difficulties as price competition from discount airlines like JetBlue and Southwest has intensified. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005.^[1] During the past 2 years, Delta decreased its number of aircraft types in an effort to reduce maintenance costs, and cut its number of unionized workers so that it now has the lowest percentage among legacy airlines ^[2]. Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings.

Despite operational improvements, Delta continues to face threats to its profitability, the most prominent among these being the price of oil. Increasing worldwide demand compounded by investor speculation has led to ongoing concern that prices will continue to rise. Delta is also vulnerable to deterioration in broader U.S. economic conditions. With less discretionary income, consumers and businesses will tend to cut back on air travel. In a move to cut costs and consolidate operations, Delta and Northwest have decided to merge. This new joint airline will be called "Delta." It will be the largest airline in the world by both enterprise value and available seat miles.^[3]

[edit] Business Financials

With a fleet of 361 owned and 223 leased planes, Delta has carrier service to 306 destinations in 58 countries. Delta has the 2nd largest^[4] and 3rd oldest^[5] fleet in the American airline industry. The airline operates on a hub-and-spoke system , centered at airports in Atlanta, Cincinnati, New York JFK, and Salt Lake City ^[6]. Delta is attempting to offset weak U.S. consumer demand by expanding heavily in international flights. The company is now offering non-stop flights from Atlanta to Shanghai.^[7]

As the graph below suggests, revenue for Delta Air Lines has increased approximately 6% each year going forward from 2006. These gains are largely attributable to increases in passenger revenue, particularly on international routings. International passenger revenue grew 17% from 2004 to 2005 and 24% from 2005 to 2006^[8].

Operating income has also picked up, reaching positive values for 2006. Higher revenue in combination with lower costs has allowed for increased profitability. Delta pursued significant cost cutting during bankruptcy, most significantly in employee salaries and aircraft rent. From 2004 to 2006, employee salaries and related costs were reduced by 32%, while costs of aircraft rent fell over 55% ^[9].

These numbers above show that Delta has been effectively lowering costs these past four years. Additionally, rising oil's impact on Delta is illustrated by the upward march of fuel costs per Available Seat Miles. However, as fuel becomes a bigger share of total expenses each year management will have less control over costs. This does not bode well for the future of the airline industry, and more mergers may come out of the current oil price environment.

Delta Annual Report^[10]

Operational terminology unique to the airline industry includes available seat miles (ASM), revenue per available seat mile (RASM) and cost per available seat mile (CASM). The three metrics are determined as follows:

[edit] Key Trends and Forces

• Rising Fuel Costs: Fuel expenses represent one of the largest single costs faced by airliners. From 2004 until 2006, fuel costs have climbed from 16% to 25% of total operating expenses^[11]. Continued oil price increases will pressure Delta’s profitability, given that the company’s purchase contracts offer only limited hedging protection against higher prices. ^[12]. Moreover, the growing cost based nature of the airline industry prevents Delta from immediately passing on these price increases ^[13].

• Domestic Governmental Regulations: Public outcry against airline delays has led to demand for a government response. In November 2007, President Bush voiced support for higher penalties for airlines that severely delay passengers ^[14]. Even more troubling for Delta are suggestions that the government might limit the number of landing slots at busy airports including several Delta hubs^[15]. This could result in significant scheduling difficulties for the airline.

• Open Skies: Delta’s post-bankruptcy business plan is focused on shifting more of its aircraft towards international routes. The majority of the airline's international flights, and 18% of its total flights, are between destinations on opposite sides of the Atlantic Ocean^[16]. This could become problematic given the recent U.S.-E.U. Open Skies agreement, which will allow for increased competition in transatlantic flights. The agreement is expected to begin in March 2008, and will among other things, allow for European airlines to operate with more freedom in the U.S. market^[17].

• Labor Costs: As part of the airline’s reorganization plan post-Chapter 11 bankruptcy, Delta negotiated temporarily lower wages for its employees. Most notably, the company entered into an agreement with the Air Line Pilots Association to lower average annual pilot labor costs by $280 million for the period between June 1, 2006 and December 31, 2009^[18]. Reduced wage costs for other airline employees will provide an additional temporary per year cost savings of $600 million^[19]. In exchange for these wage reductions, Delta agreed to provide its employees with a greater share of future company profitability^[20]. As a result, labor costs are expected to increase.

• Possible Merger: For the last several years there have been recurring rumors that Delta would merge with another airline, consolidation that would benefit Delta (and its competitors) but which historically has been difficult to achieve, partly due to the difficulty of integrating two different workforces, each with their own seniority perquisites. At the end of 2005 and through the beginning of 2006, there was speculation that an unsolicited U.S. Airways proposal for a merger with Delta would be completed ^[21]. While this idea was ultimately rejected in favor of bankruptcy, merger possibilities continue to be discussed. There are rumors that Delta held merger talks with United, although this is denied by both companies^[22]. Moreover, a hedge fund with significant positions in both Delta and United, has sent a letter to both airlines requesting that they pursue a merger^[23].

In the case of DAL merging with either United Airlines (UAUA) or Northwest Airlines (NWA). Just to give you an example of the merger, this analysis was undertaken.

^[24]

The cumulative (nominal) M&A transaction costs of the five airlines were $29.6 billion. The market cap of these five companies at the end of 207 was $15.5 billion. The ratio of market cap to nominal transaction costs was 52%.

Delta led the pack with total M&A transaction costs of $10.5 billion. Compared with a year-end market cap of $4.0 billion, this leads to the group's lowest MC/TC ratio: 38%. Over the years Delta management spent about $10 on M&A for every $4 worth of value they created. The most "successful" carrier among this list of M&A failures was US Airways Group (LCC) -- with a ratio of 76%. Delta wants to merge with Northwest Airlines (NWA). Over the 30 years since deregulation these two companies spent $16.50 to create $7.50 worth of shareholder value. From this perspective it looks like $1.00+$1.00=$0.45.

[edit] Competitors

While Delta has embarked on a shift towards increased international routings, domestic airliners remain the most significant competition. The airline industry has become increasingly price motivated, which means that both legacy and discount airlines are competition for Delta.

Delta’s closest competitors include the following:

RASM and CASM respectively allow for comparisons across airlines for unit revenue and unit costs. In the battle between low fare carriers and legacy airlines, companies like Southwest and Jetblue have found ways to reduce CASM (through lower maintenance costs from a more uniform aircraft fleet type and a “no frills” customer experience) while legacy airlines continue with their historically higher CASM operating strategy. Thus, even if both types of carriers manage to fill seats and achieve similar RASM, the low fare airlines will achieve greater profitability from their lower cost structure.

 Delta Air Lines Inc.

	Select All  |  Select None Metrics Yield per Revenue Passenger Mile Load Factor Fleet Size Revenue Passenger Miles Average Passenger Fare Gallons of Fuel Used Salaries, Wages & Benefits per Available Seat Mile Fuel Expense per Available Seat Mile Fuel Cost Operating Income Passenger Revenue Freight Revenue Cost per Available Seat Mile Revenue per Available Seat Mile Fuel Cost per Gallon Net Income Cancel

	Select All  |  Select None Companies Air France ADS (AKH) Aircastle (AYR) Allegiant Travel Company (ALGT) China Eastern Airlines (CEA) China Southern Airlines Company (ZNH) American Airlines (AMR) Continental Airlines (CAL) Delta Air Lines Inc. (DAL) EXPRESSJET HOLDINGS (XJT) Frontier Airlines Holdings (FRNT) Gol Linhas Aereas Inteligentes S.A. (GOL) Hawaiian Airlines (HA) JetBlue Airways (JBLU) Lan Chile S.A. (LFL) MAIR Holdings (MAIR) Midwest Air Group (MEH) Mesa Air Group (MESA) Northwest Airlines (NWA) Pinnacle Airlines (PNCL) Republic Airways Holdings (RJET) Ryanair Holdings (RYAAY) SkyWest (SKYW) Southwest Airlines Company (LUV) TAM S.A. (TAM) US Airways Group (LCC) United Airlines (UAUA) Air France-KLM (AFLYY) AirTran Holdings (AAI) Alaska Air Group (ALK) Copa Holdings, S.A. (CPA) Cancel

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Company	Data From	Net Income	Passenger Revenue	Freight Revenue	Fuel Cost per Gallon	Cost per Available Seat Mile	Revenue per Available Seat Mile
American Airlines (AMR)	2007	$504M	$20.7B	$8.25B	$2.12	$0.114	$0.107
Continental Airlines (CAL)	2007	$459M	$13B	$453M	$2.18	$0.108	$0.112
Delta Air Lines Inc. (DAL)	2007	$1.61B	$16.9B	$482M	$2.24	$0.119	$0.112
JetBlue Airways (JBLU)	2007	$18M	$2.64B	Add	$2.09	$0.0838	$0.0826
Northwest Airlines (NWA)	2007	$2.09B	$9.43B	$840M	$2.05	$0.108	$0.116

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[edit] Market Share

Delta is the fourth largest airline in the United States, capturing approximately 11% of the domestic commercial airline market. The top ten U.S. airlines by market share are ranked below, where market share is measured in terms of domestic revenue passenger miles.

[edit] Notes

1. ↑ Marketwatch
2. ↑ Delta 2006 10K, Item 7, pg. 22-23
3. ↑ Reuters
4. ↑ http://en.wikipedia.org/wiki/Largest_airline#Passenger_airlines
5. ↑ http://www.ajc.com/business/content/business/delta/stories/2008/04/18/fleet_0419.html
6. ↑ Delta 2006 10K, Item 1, pg. 2
7. ↑ [1]
8. ↑ Delta 2006 10K, Item 7, pgs. 26 and 30
9. ↑ Delta 2006 10 K, Item 7, pgs. 27 and 31
10. ↑ Delta 2006 10K, Item 1, pg. 1
11. ↑ Delta 2006 10K, Item 1, pg. 2
12. ↑ Delta 2006 10K, Item 1, pg. 3
13. ↑ Delta 2006 10K, Item 1a, pg. 9
14. ↑ The Washington Post, “Bush Frees up Military Airspace for Thanksgiving”, November 15, 2007
15. ↑ Delta 2006 10K, Item 1, pg. 5
16. ↑ Delta 2006 10K, Item 1, pg. 1
17. ↑ United States Department of State, “U.S.-E.U. Air Transport Agreement – Open Skies Plus”
18. ↑ Delta 2006 10K, Item 7, pg. 23
19. ↑ Delta 2006 10K, Item 7, pg. 23
20. ↑ Delta 2006 10K, Item 7, pg. 23
21. ↑ Delta 2006 10K, Item 7, pg. 24
22. ↑ The Courier-Journal, “United-Delta Merger Possibility Reported”, November 15, 2007
23. ↑ The New York Times, “Hedge Fund Seeks Delta-United Deal”, November 14, 2007
24. ↑ Delta+Northwest: Y'all Buckle that seat belt!
25. ↑ Reutersretrieved July 7, 2008.
26. ↑ Delta 2006 10K, Item 6, pg. 19
27. ↑ AirTran 2006 10K, Item 6, pg. 22
28. ↑ Alaska Air Group 2006 10K, Item 6, pg. 27
29. ↑ American Airlines 2006 10K, Item 7, pg. 40
30. ↑ Continental 2006 10K, Item 6, pg. 29
31. ↑ Frontier 2006 10K, Item 6, pg. 30
32. ↑ JetBlue 2006 10K, Item 6, pg. 26
33. ↑ Northwest 2006 10K, Item 6, pg. 24
34. ↑ Southwest 2006 10K, Item 6, pg. 15
35. ↑ United 2006 10K, Item 6, pg. 32
36. ↑ US Airways 2006 10K, Item 7, pg. 44
37. ↑ ^{37.0 37.1 37.2} AMR 2007 10-K, Item 8, pg na
38. ↑ ^{38.0 38.1 38.2} AMR 2007 10-K, Item 7, pg na
39. ↑ ^{39.0 39.1 39.2 39.3} CAL 2007 10-K, Item 6, pg _
40. ↑ ^{40.0 40.1} CAL 2007 10-K, Item 7, pg _
41. ↑ ^{41.0 41.1} DAL 2007 10-K, Item 8, pg. F-6
42. ↑ ^{42.0 42.1 42.2} DAL 2007 10-K, Item 6, pg. 24
43. ↑ ^{43.0 43.1} JBLU,2007 10-k, Item 8, pg 46
44. ↑ ^{44.0 44.1 44.2} JBLU,2007 10-k, Item 6, pg 26
45. ↑ ^{45.0 45.1 45.2} NWA 2007 10-K, Item 6, 22
46. ↑ ^{46.0 46.1 46.2} NWA 2007 10-K, Item 6, 23
47. ↑ U.S. Department of Transportation, Bureau of Transportation Statistics